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Special report: Real estate investment managers

Real estate assets jump 11.5% in serene market

Peter Rogers said for several years now distributions to investors have been greater than manager capital calls.

Most worldwide categories see gains; managers find themselves flush with cash

Property appreciation and a swell of commitments to real estate that came in faster than managers could spend the capital helped to buoy managers' worldwide real estate assets under management, which rose 11.5% to $1.48 trillion in the year ended June 30.

The increase in worldwide AUM surpassed the 8.7% growth of the prior 12-month period, according to Pensions & Investments' annual survey of real estate managers.

Most categories of worldwide assets rose for the most recent period.

Worldwide AUM in hybrid debt exhibited the most growth, increasing 48.2% to $13.3 billion, after slipping 7.3% in the year-earlier period. Timber and agriculture assets continued a positive swing, with timber up 10.7% to $35.2 billion and farmland up 2.8% to $19.2 billion.

Worldwide assets managed in real estate investment trusts rose to $481.2 billion, up 15.6% from a year ago.

Total real estate assets managed for U.S. institutional tax-exempt clients grew 12.3% to $594.9 billion.

While market appreciation and total returns pushed up the assets under management, real estate managers for the past several years have been calling less capital to invest than they have been returning to investors in distributions, said Peter Rogers, Chicago-based senior investment consultant in the manager research group of general investment consultant Willis Towers Watson PLC.

Investment managers are trying to be more selective and cautious in what they buy, he said. They are attempting to find the right deals as increased competition has driven up prices, Mr. Rogers added.

Among the top 10 managers of worldwide real estate assets, Nuveen LLC, ranked first with $114.4 billion, up 15%; MetLife Investment Management was second, with assets of $113.1 billion, up 7%; and PGIM, the asset management arm of Prudential Financial Inc., was third with assets of $106.5 billion, up 2%.

Aviva Investors, which was on P&I's top 10 list last year, did not respond to the most recent survey. Aviva ranked eighth last year among the top 10 managers of worldwide real estate assets, with $44.6 billion in AUM. In May, LaSalle Investment Management agreed to acquire Aviva's $7 billion multimanager real estate business and Aviva's stake in real estate fund Encore+, which the two firms co-own.

Among the managers' U.S. institutional tax-exempt AUM, most sectors tracked by P&I rose in the most recent survey period.

U.S. institutional tax-exempt real estate equity assets were up 12.6% to $469.2 billion, continuing the sector's steady growth since 2010. Loans managed for U.S. institutional tax-exempt clients had the most growth, albeit from a small base, up 66.2% to $2.8 billion.

Other credit strategies had strong growth as well. Hybrid debt was up 30% to $7.4 billion, mezzanine was up 29% to just less than $8 billion and mortgages were up 9.8% to $71.9 billion.

Strong debt increases are "largely reflective of an ongoing trend we've seen since 2015 ... that we are seeing across the private debt spectrum," Mr. Rogers said.

With historic low levels of cap rates (a measure of expected real estate returns), and a long-in-the tooth real estate cycle, investors think debt strategies are more likely to offer enticing risk-adjusted returns than equity strategies, he said.

For the year ended June 30, the National Council of Real Estate Investment Fiduciaries Property index returned 7.2%, up from the 6.97% return for the 12 months ended June 30, 2017. The return from the income component of the index was 4.6%, with the appreciation component adding 2.5%.

REIT assets up double digits

Worldwide REIT assets grew by double digits despite slightly lower combined returns of equity and mortgage REITs.

As of June 30, the total return of the FTSE NAREIT All REITs index was 1.1%, and the FTSE NAREIT All Equity REITs index was 1.27%, according to data provided by the Washington-based National Association of Real Estate Investment Trusts.

By comparison, the total return on the FTSE NAREIT All REITs index was 1.38% for the year ended June 30, 2017, and the total return on the FTSE NAREIT All Equity REITs index for that period was 0.22%.

"REITs have largely been out of favor since 2015, trailing the broader equity markets and private real estate indices," Mr. Rogers said. "After trading at fairly large discounts to private market values earlier in the year, prices have rebounded helping to narrow this gap."

The top three REIT managers ranked by worldwide assets remained in the same position as last year.

BlackRock (BLK) ranked No. 1 with $199 billion in REITs, up 71.6% from last year. Vanguard Group Inc. placed second, with $60.7 billion, down 5.7%.

Cohen & Steers Inc. was next, with $36.1 billion in assets, also down 5.7%.

Institutional fund flows have been stable in that Cohen & Steers and some of its peers have been able to attract new capital, as REITs look inexpensive relative to other asset classes, explained Tom Bohjalian, New York-based executive vice president and head of the U.S. real estate team and senior portfolio manager at Cohen & Steers.

At the same time, institutional investors are consolidating their REIT managers, he said.

"Managers that have underperformed in the last three-to-five years are starting to lose assets and the assets are being concentrated (among) managers with the better track records," Mr. Bohjalian said. "We have benefited from that concentration."

Japanese investors — both retail and institutional — have been "a huge driver of (REIT AUM) growth in the last five to 10 years," he said.

Last year, there was a meaningful drop in assets from Japanese investors because of signals by Japanese government regulators and lower distribution rates, leading investors to move capital out of REITs. Some $7 billion moved out of the total of $48 billion in Japanese real estate mutual funds that were subadvised mostly by U.S. managers in 2017, Mr. Bohjalian said. About 15% of Cohen & Steers' total worldwide assets are Japanese mutual funds.

Familiar names

The AUM of the 50 largest real estate managers of U.S. institutional tax-exempt assets, representing 93% of the total in P&I's universe, grew 16.4% to $554 billion in the most recent survey period, outpacing the 5.8% increase of last year's survey.

The top three managers held their positions: Nuveen is in the top spot with a 7.3% increase to $77.8 billion; PGIM was second with assets up 1.8% to $52.1 billion; and J.P. Morgan Asset Management (JPM) was in third place with assets up 4.4% to $48.4 billion.

Jose Minaya, Charlotte, N.C.-based chief investment officer and president of Nuveen Global Investments, attributed the growth to "the progression of a strategy the firm laid out," including the 2015 acquisition of Henderson Global Investors' non-U.S. real estate assets. (The two firms had run a joint venture that launched in 2014.)

Since then Nuveen has been unifying and integrating the division with its North American business, Mr. Minaya said.

While Nuveen's total U.S. institutional tax-exempt real estate assets grew, its real estate equity assets dipped 3.3%, to $29.8 billion, during the survey period.

"It's pretty late in the cycle and we've had a pretty strong run now for over a decade," Mr. Minaya explained. Nuveen executives saw opportunities to take gains and sold some assets during the survey period, he said.

The dip in real estate equity assets placed Nuveen in third position on P&I's list of managers of real estate equity. J.P. Morgan Asset Management was in first position with its real estate equity assets increasing 4.8% to $46.8 billion, followed by PGIM, up 4% to $34.1 billion.

Nuveen has invested the most in and hired more new investment professionals for debt strategies, Mr. Minaya said.

Nuveen tops the list of mezzanine managers, with assets in that category up 47% to $4.6 billion. Brookfield Asset Management is second on the mezzanine ranking, up 14% to $786 million, followed by PGIM, with assets rising 6% to $628 million.

Nuveen also was in first position on the list of managers of mortgages, with assets increasing 15% to $30.3 billion. PGIM was second even though its mortgage assets dipped 2% to $15.5 billion. New York Life Investment Management was in the third spot with assets up 10% to $3.9 billion.

J.P. Morgan Asset Management executives attribute their continued standing at the top of P&I's overall and sector lists of U.S. institutional real estate managers to continued investment by pension plans and increasing investment by defined contribution plans.

Derisking a factor

J.P. Morgan Asset Management (JPM)'s real estate strategies continue to receive positive capital flows from public pension plans, said Kevin Faxon, New York-based managing director and head of real estate, Americas.

"We have benefited from pension funds doing more with fewer (managers)," Mr. Faxon said.

Corporate pension plans "are a different story" because they have frozen their defined benefit plans.

"We see continued derisking of corporate plans … Flows are negative, which is a trend you should see industrywide," Mr. Faxon said.

JPMAM has seen its base of corporate pension plan clients investing in real estate shrink in the past 12 months, he said. However, the defined contribution segment "is growing exponentially," Mr. Faxon said. "DC is where the growth is. The challenge is how to provide exposure" to real estate.

JPMAM's real estate assets managed for defined contribution plans grew 29% in the year ended June 30 to $4.5 billion, placing the firm in the third spot on the list of real estate managers of defined contribution plan assets. Nuveen is in the top position with $21.8 billion managed for defined contribution plans; it did not report defined contribution assets last year. PGIM is second with defined contribution assets up 2.4% to $14.4 billion.

JPMAM topped the list of managers of open-end funds, seeing its assets grow 5% to $38.9 billion. PGIM was second, increasing 15% to $31.5 billion; UBS Asset Management in the third spot with open-end fund assets slipping 1% to $25.4 billion.

UBS executives witnessed growth in separate accounts during the survey period, not only from U.S. investors but also from Asian and European investors, said Matthew Lynch, Hartford, Conn.-based head of U.S. real estate at UBS Asset Management's real estate and private markets group.

"Outside the U.S., we are still seeing a process — that is mostly completed in the U.S., — of institutional investors hiring managers to manage (real estate) assets (in funds or separate accounts) rather than investing directly," Mr. Lynch said.

In the U.S., UBS has seen "dynamic growth" in hybrid debt, Mr. Lynch said.

UBS ranks first on P&I's hybrid debt managers with assets growing 7% to $4 billion. Related Fund Management's hybrid debt assets grew 32% to $1.8 billion, placing it second, and USAA Real Estate's was third with $1.1 billion. USAA did not report hybrid debt assets in last year's survey.